原标题：【原创】The New Normal of China’s Macroeconomic Policy
Zhang Xiaojing(张晓晶)*
Academic Division of Economics, Chinese Academy of Social Sciences, Beijing, China
Abstract:This paper summarizes the theoretical background and realistic considerations for the emergence of the new normal of macro regulation. The characteristics of the new normal of macro regulation are as follows: 1) a supply-side approach in response to growth slowdown; 2) understanding economic heterogeneity and growth disequilibrium and paying attention to structural regulation;3) highlighting strategic planning and broadening the horizon of macro regulation;4) re-establishing a benchmark of macro policyand re-initiating local competition;5) balancing the interests of various stakeholders and understanding the political economyof macro policy;6) respecting the spillover effects of major countries and implementing responsible macro policies;7) respecting “market determinism” and recognizing the limitations of macro policy;and 8) propelling institutional developments and creating a basic framework of macro policy.This paper concludes that the new normal of macro policyis not simply a passive adjustment to the new normal of economy but represents an initiative of proactive response that steers the economy towards a more advanced form. In particular, the following issues should be clarified in current macro policy: someof the characteristicswill be corrected or phased out, somethat coincide with the new normal will beabreast with the times, and somerequire that a new trail be explored through innovation of macro policy. These components will constitute the basic framework for China’s macro policyto transition towards the new normal.
Key words: new normal, innovation of macro policy, Chinese characteristics
JEL: E60, O11, O20
China’s macroeconomicpolicyover the past 30-odd years since reform and opening up in 1978 offers both experiences and lessons. Yet on the whole, macro policyhas been improving and generally positive. From initially imitating the practices of sophisticated market economies to today’s achievements that have prompted Western scholars to “learn from China’s macro policy” (Roach, 2012), China’s macro policyhas begun to gain hard-won confidence. This is the basic premise for China’s macro policyauthorities to maintain strategic poise in exercising the macro policy. Nevertheless, China’s macro policysystem remains imperfect and themechanisms and means need improvement. In particular, macro policyis yet to more closely follow the developments of economic transition and rapid structural evolution.
“Understanding the new normal, adjusting to the new normal and developing under the new normal” is the overarching philosophy of China’s economic development for a certain period of time to come. The new normal of economic development calls for new paradigms of macro policy. Hence, the innovation of macro policymust take the new normal as the basic context and the starting point of discussion. The new normal of China’s economy is characterized by structural deceleration, shift of growth momentum and optimization of the economic structure. Correspondingly, the basis, subjects, objectives and methods of macro policymust evolve as well. From the perspective of macro policy, we cannot passively adjust to the new normal but must take the initiative to develop under the new normal. Therefore, a new normal of macro policycompatible with the new normal of economic development must be created. This argument is the starting point of this paper.
1. Theoretical Background and Realistic Considerations of the New Normal of Macro Policy
In the discussion of the background of the new normal of China’s macro policy, it is appropriate to use theoretical and practical perspectives as the starting points.
Theoretically, the reflections of mainstream Western economics have “rediscovered” the unique value of China’s macro policy, which givesus more confidence in exercising macro policy. This paper identifies a few highly relevant aspects of China’s macro policyexperience. First is the new approach of monetary policy that no longer regards interest rate as the only policy instrument and puts a premium on the use of all available instruments, adopting the policy portfolio of “interest rate plus other instruments” to achieve the objectives of output, inflation and financial stability. This portfolio includes macro prudential policy and quantitative instruments (such as quantitative easing or nonconventional monetary policies) (Zhang Xiaojing, Dong Yun, 2013).
The second aspect is the return to industrial policy. Among scholars and policymakers in advanced economies, industrial policy used to be seen as heresy and inappropriate government intervention that distorted market mechanisms and therefore was subject to criticism in mainstream Western economic textbooks. Yet the eruption of the recent global financial crisis prompted mainstream Western scholars to revisit industrial policy. They came to realize that industrial policy was no longer unique to developing countries and that it could also serve as a secret weapon for advanced economies to recover from the financial crisis.
The third aspect is the legitimacy of capital control. The recent global financial cycle theory provides new support to capital control (Rey, 2013). The global financial cycle refers to the global cycle of capital flow, asset prices and credit growth, which fluctuate with the VIX index (volatility index of market uncertainty and risk aversion). According to analysis, the major factor that gave rise to the global financial cycle was the monetary policy of core countries (such as the United States) and an independent monetary policy was tenable only when capital account was under control. Hence, capital control once again became a favorable option. For many developing countries that have exercised capital control (e.g., Malaysia and China), this represents a belated recognition of the legitimacy of such control.
The fourth valuable feature of China’s macro policyis an emphasis on structural regulation. The major policy mistake behind the latestround of global financial crisis is that mainstream scholars focused on aggregate indicators like inflation, output, employment and asset prices while neglecting structural indicators such as the composition of output, leverage ratio and the risks exposed by external imbalance. Post-crisis reflections have highlighted the importance of structural regulation. The aforementioned new approach of monetary policy, industrial policy and capital control reflect the consensus that has been reached in mainstream academia regarding structural regulation. As a matter of fact, industrial policy, trade policy, exchange rate policy, capital control policy and macro prudential policy may all be classified as structural regulation policies in the broad sense and serve as important supplements to the aggregate regulation policy.
In practice, the new normal of macro policyis a response to realistic demand as the economy enters into the new normal. In tandem with the changes in growth rate, economic structure and growth drivers, the new normal naturally calls for innovation in the approach to and method of macro policyand the enrichment and improvement of new regulatory approaches for China’s economy to maintain its steady and healthy momentum of development after entering the new normal.
2. Characteristics of the New Normal of Macro Policy
2.1 Supply-Side Approach in Response to Growth Slowdown
Another striking feature of the new normal is structural deceleration. Thus, the most prominent task of macro policyin the future is to stabilize growth and respond to potential growth deceleration. Prior to the new normal, macro policyfocused more on the management of output gaps, i.e., gaps between real output and potential output. Normally, demand should be suppressed in times of positive output gaps (economic overheating) and expanded in times of negative output gaps (economic overcooling). The biggest difference of macro policyin the new normal is that the problems encountered are related to the decline of potential output. Hence, macro policyshould focus on stabilizing potential output or preventing its significant decline. It is such a change that it has brought new thinking to macro policy. While demand policy is employed to manage output gaps, the management of potential output itself should give more prominence to a supply-side approach,particularly the structure and efficiency of supply-side (Li Yang, Zhang Xiaojing, 2015).
Mid- and long-term deceleration is the major challenge confronting China’s economy, highlighting the importance of supply management approach. From the mid- and long-term perspective, China’s economy is subject to various “supply constraints” in such areas as population and labor, capital and finance, resources and property rights, technology and innovation, as well as institutional systems and division of labor. Long-term economic potential can be unleashed by relaxing birth control, easing the threshold for rural migrants to be granted urban citizenship, reducing capital and financial control, optimizing the ownership structure of land and resources and advancing the institutional reform of inefficient sectors such as state-owned enterprises (SOEs) in order to eliminate “supply constraints.”
Of course, an emphasis on a supply-side approach does not mean neglecting demand. Supply-side structural reform cannot be advanced unless short-term macro stability is guaranteed. In the short term, therefore, it is still necessary to stabilize aggregate demand. Supply and demand cannot be antagonized with each other, nor can short-term macro stability and mid- and long-term growth. This is a dilemma that needs to be carefully addressed by policy makers of various countries.
2.2 Understanding Economic Heterogeneity and Growth Disequilibrium and Paying Attention to Structural Regulation
Compared with sophisticated market economies, an important characteristic of developing economies is strong economic heterogeneity and growth disequilibrium that give rise to structural problems. The emergence of structuralist development economics is the best footnote to such problems.
China’s economic structural problems can be summarized as follows: First, institutional structures involving the relationships between state-owned and private sectors, institutional transition and double-track transition, central and local governments and government and market roles.Second, economic structures including industrial structure, regional structure, distribution structure, growth momentum, urban and rural dual structure and demographic structure. These evolving structural problems necessitate structural regulation. Structural change means change in the foundation of macro policyand policy transmission mechanism, which may cause the failure of aggregate regulation. Furthermore, changesin returnsto factors and factor flowcaused by rapid structural changes are likely to induce structuralimbalance whenprice signal is inaccurate and imperfect, making structure regulation indispensable. In addition, as a result of structural change and imbalance, many issues are no longer simply issues on short-term macro stability but issues that also relate to the coordination between short-term macro policyand mid- and long-term development. Structural adjustment is vital to mid- and long-term sustainable development.
Different structural problems will give rise to different approaches to structural regulation. For the problems of institutional structure, given incomplete economic transition and double-track transition, the approach of double-track regulation holds sway, i.e., administrative regulation used in tandem with market regulation. Due to the existence of economic structural problems, policymakers have relied on both structural and aggregate regulation. Industrial policy, trade policy, foreign exchange policy, capital control and strict financial regulation, as well as a balanced fiscal policy with significant features of administrative intervention and structural regulation, have played an important role in promoting economic growth and macro stability (Zhang Xiaojing et al. 2010).
As China’s economy enters the new normal, institutional structural problems will diminish yet economic structural problems will continue to exist in the long term. Thus, structural regulation remains indispensable. As a matter of fact, structural problems abound even in advanced economies (as exposed in the eruption of the latestglobal financial crisis) and also require the response of structural reforms and relevant structural policies. Therefore, adherence to structural regulation will be an important characteristic of the new normal of macro policy.
2.3 Highlighting Strategic Planning and Broadening the Horizon of Macro Policy
Implementation of China’s macro policyis mainly by the troikaofthe National Development and Reform Commission (NDRC), the Ministry of Finance and the People’s Bank of China (PBoC). These institutions not only form conventional fiscal and monetary policies but develop long-term strategic planning to bring about integrated short-term, mid-term and long-term perspectives with an extended horizon of macro policy. Among the three carriages, the NDRC is the dominant agency whose functions cover most macro and micro fields of economic operation. The Ministry of Finance and the PBoC are subject to the guidance and constraints of the NDRC when it comes to policy formulation and implementation. Economic policies must conform to national strategic planning. Without the NDRC’s approval, the funds of the Ministry of Finance and bank loans cannot be turned into investment.
The regulatory model underpinned by planning, fiscal and monetary policies reveals strong Chinese characteristics, which put a premium on “the orientation of national development strategies and planning, the use of fiscal and monetary policies as measuring instruments, as well as coordination between fiscal and monetary policies and industrial and price policy instruments.” This approach is far more complex than the stabilization policy described in mainstream Western textbooks that focus on short-term fluctuations. It should be noted that even some advanced economies have begun to emphasize strategic planning and industrial policy rather than regarding such government interventions as acts of market distortion as they did before. American scholar Jeffrey Sachs (2014) indicated to the effect that “there is one thought regarded by Washington as heresy but is thought-provoking.” As the fastest growing economy in the world, China relies on five-year plans for public investment, which are managed by the NDRC. There is no such institution in the United States that is systematically responsible for public investment strategies. But today, all countries need five-year plans and even beyond: they need two-decade strategies that span across a whole generation to create skills, infrastructures and low-carbon economy for the 21stcentury.
The new normal of macro policyrequires that the synergy from planning, fiscal and monetary policies as the three major regulatory leverages be brought into full play and that attention be paid to both short-term fluctuations to stabilize growth and long-term priorities to promote reform. More specifically, efforts must be made to strengthen the macro guidance of national development strategies and planning, coordinate various functions, and bring into play the role of national development planning in coordinating policy measures on government budget arrangements, the use of financial capital, the development of land and the rational allocation of resources. While planning identifies the future directions of development and focus areas, many planning and investment projects are directly linked with budget arrangements. Therefore, in planning, consideration should be given to fiscal power and spending structure. Meanwhile, the intensity of monetary policy should be compatible with the objectives of planning as well. Moreover, fiscal and monetary policies should be coordinated with the industrial and price policy instruments of the NDRC. For instance, the NDRC’s industrial policies directly relate to the fiscal arrangements and tax credits of fiscal policies, while the NDRC’s price reform may affect the standards of monetary policy.
2.4 Re-establishing a Benchmark of Macro Policyand Re-initiating Local Competition
At the beginning of 2015, China’s local governments unusually lowered GDP growth objectives. To some extent, this was a response to the new macro policy where GDP growth was no longer the sole benchmark of government performance. This policy shift was often misunderstood at the local level as abandoning growth. In the heat of anticorruption campaigns, local officials became discreet and refrainedfrom taking bold actions for fear of getting into trouble. While the advancement of reform brought changes to various interests, there was no clear plan to follow in the implementation of reform. As a result, local governments tendedto adopt a wait-and-see attitude. Furthermore, the rights and responsibilities werenot clear and the incentives werenot compatible between central and local governments.
These factors have diminished the momentum of local competition and greatly dampened local vibrancy. The question is without GDP as the benchmark of local competition, what should be the alternative incentives to mobilize enthusiasm at the local level?
This paper argues that in the new normal, local competition should shift from GDP competition to the competition of public goods and services. Local competition triggered by the provision of public goods and services is generally described by the theory of “foot voting” (Tiebout, 1956). People will choose to live in a place where the public services provided are the most suitable. By “voting with their feet”, they will encourage local governments to provide public goods based on the preferences of local residents. Although the theory of “foot voting” may not be fully compatible with China’s reality (for instance, the interregional flow of population may not be very convenient), evaluation of local government performance by the types, quantity and quality of public goods and services is worth referencing for China in the new stage of development. Transition from GDP competition to the competition of public goods and services means the weakening of GDP-based evaluation for local governments and giving greater prominence to local public services, market regulation, employment level, social security, maintenance of public security and environmental protection.
In order to re-initiate local competition, efforts must be made to enhance positive incentives and the key is to properly balance the relationship between central and local governments and create a mechanism of compatible incentives. First, local governments should be endowed with greater legislative powers in order to deal with local matters in their own discretion. The revised Legislation Law enables local governments to formulate local laws and regulations in a science-based and targeted manner according to local conditions.The central government should further concentrate the use of its fiscal resources and reduce special transfer payments and inappropriate intervention in local governments. Local governments should also focus the use of financial resources in specific areas and increase their autonomy. Local governments should be permitted to collect certain local taxes under a national policy framework. Moreover, consumption tax reform should be carried out to shift tax collection from the production stage to the retail stage. This paper suggests that the current system where consumption tax is collected by the central government should be reformed so that tax revenues are collected by local governments in order to incentivize measures to be taken at the local levels to promote consumption. These measures include increasing household income and improving the local consumption environment (the natural environment may also be included to attract consumption by non-locals to increase tax revenues). Another recommendation is to reform the current system of value-added tax where only one third of the tax revenues are collected by local governments, so that the proportion of tax sharing can be increased in favor of local governments (e.g., 50%) in order to expand local fiscal power and inspire local dynamism.
2.5 Balancing the Interests of Various Stakeholders and Understanding the Political Economyof Macro Policy
Various stakeholders of macro policyare relatively independent entities with conflicting interests. As a result, macro policies are likely to be “captured” and the policy effects could be compromised or run counter to the original intention of regulation. This is the so-called political economyof macro policy.
First of all, the initiatives of stakeholders should be recognized to prevent policy overshooting. After decades of development, China’s socialist market economy has become an arena formultiple stakeholders including local governments and market players. When it comes to macro policy making, the expectation is that if the central government takes no action, local governments may take action; if the government takes no action, the market may respond. In some instances, even if the central government is slow in taking action, local governments or market players respond naturally and the results turn out to be fine. However, when decision-makers become overstressed and repeatedly issue one policy after another, local governments and market players may over respond (referred to as “overshooting”).
Second, the impact of conflicting interests on macro policy. Macro policygenerally takes one of two directions: expansion or contraction. Expansive macro policywill benefit certain sectors or groups of population, while contraction will hurt their interests. No matter which type of macro policyis to be adopted, lobbyists will always emerge to offer their own analysis and suggestions. As a matter of fact, the interests of ordinary people are the most vulnerable. Although some scholars and experts consider themselves to be the spokespersons for ordinary people and the opinions of netizens also partially reflect their interests, the voices of ordinary people are always less heard. This is an important aspect of macro policythat calls for improvement of people’s welfare as the purpose of macro policy.
Third, the roles of central and local governments in macro policy. Under resistance by local interests, policies issued by the central government often backfire in implementation (Ouyang Rihui, 2007). As such, the effects of macro policywill be greatly compromised. This requires that efforts be made to regulate government behavior, adjust the government performance evaluation system (e.g., to make GDP no longer the sole benchmark), and enhance the authority of central government through institutional and legal development to ensure the effect of policy implementation and macro policy.
In a nutshell, fair and effective macro policypolicies should be formulated and implemented in a cautious manner to balance the interests of stakeholders and anticipate their likely reactions based on an understanding of the micro basis and mechanism of macro policy.
2.6 Respecting the Spillover Effect of Major Countries and Implementing Responsible Macro Policy
In today’s world of economic globalization, the economic policies and activities of major advanced economies like the United States never fail to exert major influences on other countries, i.e., the spillover effects of major countries. The fact that global markets are closely following the US Federal Reserve is a good example. Meanwhile, as the second largest economy, China has become an important player in the world economy. Therefore, in international policy coordination, attention should be paid to both the impact of advanced economies like the US on China and the influence of China on the rest of the world.
The spillover effects of major countries require that international policy coordination be enhanced and that various countries adopt responsible economic policies.
First, China should lose no time in developing a mechanism for participating in international macroeconomic policy coordination. Efforts must be made to closely follow international economic and financial situations and changes in the macroeconomic policies of major economies, investigate their impact on China’s macro-economy and policy implementation, step up policy coordination and communication with major economies, more proactively take part in bilateral and multilateral international economic cooperation, enhance the international right of discourse, reform international macroeconomic governance structure, promote a fair and reasonable international economic order, develop a favorable institutional environment for China, broaden the space of development and safeguard the interests of openness.
Second, various countries should be urged to adopt responsible economic policies. In formulating development plans and macroeconomic policies, China should take into account the potential impact on the outside world. The new normal of macro policyrequires a global vision, a cooperative attitude and responsible economic policy-making. China’s policies must be responsible for the Chinese economy and the world economy alike. Development of China’s economy will create a broader market and more potentials for other countries and bring about more positive spillover effects and “positive energy” to the world economy. On the other hand, other countries should also adopt responsible economic policies, taking into account their impact on China. For instance, the United States should consider the spillover effects of its economic and financial policies (e.g., potential global repercussions that might arise from the normalization of monetary policy) in formulating these policies. This requires self-restraint and the mutual supervision and coordination of certain mechanisms (such as G20).
